Domestic Production as a Solution to the Treatment GapOlulomire Ogunye, Will Smith Natalie Hays Stewart, and Kuna Malik Hamad

AIDS, Africa and ARVs

Global Challenges: Science and SocietyDecember 14, 2009

AIDS, Africa, and ARVs Domestic Production as the Solution to the Treatment Gap

Olulomire Ogunye, Will Smith, Natalie Hays Stewart, and Kuna Malik Hamad!

Abstract

Part I gives an overview of key terms, including ARVs, TRIPS, Global Fund and CHAI, which

are necessary to understand before delving into the more complex issues within the treatment of

HIV/AIDS. Part II investigates the weaknesses of the current system of ARV supply. The first

section discusses the problems with brand-name production, while the second looks at challenges

that current generic manufacturers face, which could restrain Africa’s access to their imported

drugs- such as changes in patent laws and WHO recommendations, or decreased Global Fund

budgets. Part III provides the solution of domestic production and then goes into the details of

what has worked, what hasn’t worked in the past, and also what could work in the future, using

five specific case studies of current generic pharmaceuticals in Africa as examples. Part IV

addresses the main criticisms of the model of domestic production: comparative advantage, the

infant industry argument, and opportunity cost, and then provides counterarguments for each of

these points. Part V is a policy proposal to the World Bank suggesting that they grant a loan of

$2 million to domestic manufacturers seeking WHO approval who apply and qualify. The paper

also includes a mock press release that could be used by the World Bank to introduce the nature

of the loan.

1

Introduction

! “Most global health issues can truly be understood only within the larger context of the

HIV/AIDS pandemic.” 1 This statement may seem exaggerated considering only 33 million out of

six billion people in the world are infected with HIV/AIDS. However, when left out of control,

AIDS weakens individuals and makes them more susceptible to other infectious diseases, such as

TB.2 In addition, the economic burden of AIDS consumes entire public health systems in

developing countries.3 Considering these factors, focusing on the AIDS epidemic can help to

reduce the threat of global pandemics, and free up funding and space for other diseases to receive

the attention and support they need.

! Though investment in prevention is also important to mitigate the epidemic, without

treatment, the current 33 million people infected with AIDS will be left to die. Anti-retrovirals

have been proven to increase life expectancy of someone living on AIDs, and with generic

manufacturing, they are now affordable to people in developing countries. Many organizations,

such as Global Fund, PEPFAR, and the Clinton HIV/AIDS Initiative have donated significant

money towards achieving their 2010 goal of universal access of ARVs. Despite these efforts,

they expect to fall short of the 2010 goal, leaving many people without treatment4.

! Sub-Saharan Africa has been the hardest hit by the epidemic. In 1993, 9 million (out of a

worldwide 14 million infections) were in Sub-Saharan Africa. Today, 22.5 million (out of a

global 33 million infections) are from Sub-Saharan Africa. To put things in perspective, Haiti is

the country with the highest prevalence rate outside of Sub-Saharan Africa, with a prevalence

rate of only 2.2%.5

! In terms of treatment, Sub-Saharan Africa uses almost four times the ARVs of the rest of

the world combined. However, the current system of treatment for HIV/AIDs is still insufficient.

According to the WHO/UNAID/UNICEF 2009 progress report “Towards Universal Access,”

2

1 Knobler, Stacey, Adel A. F. Mahmoud, and Stanley M. Lemon. 2006. The impact of globalization on infectious disease emergence and control exploring the consequences and opportunities : workshop summary. Washington, DC: National Academies Press. p. 442 Ibid.3 Ibid. p. 454 Edwin. 2007. “Global Fund still short of $8 billion.” Universal Access AIDS Campaining.! http://www.ua2010.org/en/UA2010/Universal-Access/Latest-UA-News/Global-Fund-still-short-of-8billion-Some-countries-stepping-up-to-the-table-but-G8-contribution-still-falls-short5 HIV InSight. 2009. HIV/AIDS in Haiti. HIV InSight. University of California, San Francisco

66% of people who ARVs in Sub-Saharan Africa (around 6,700,000 people), are still not

receiving treatment. Not to mention the 2,925,000 people who have already begun treatment,

will need to continue receiving ARVs for the rest of their lives6. There is still a gap between what

Donor organizations are able to provide and what is needed on the ground. The burden continues

to expand as new people need treatment and old patients need to switch to even more expensive

second-line drugs. Moreover, international donor funds have recently been more constrained,

leaving African countries to find new resources to solve the demand for ARVs7.

! Domestic Production of ARVs can help to reduce the cost of ARVs while lifting the

entitlement burden off the shoulders of the United States and international donors. Many big

pharmaceuticals have already begun to partner or invest in African generic pharmaceutical

companies, in countries such as Ghana, Uganda, South Africa, and Mozambique. While each of

them has applied for domestic or voluntary licensing to produce generic ARVs, this paper

3

6 World Health Organization, Joint United Nations Programme on HIV/AIDS., and UNICEF. 2009. Towards universal access: scaling up priority HIV/AIDS interventions in the health sector : progress report 2009. Geneva: World Health Organization. NOTE: Graph from Source also.7 Health Gap. “The Global Fund’s Funding Crisis.” Health GAP: Global Access Project.! http://www.healthgap.org/globalfundshortfallfacts.htm

suggests that they consider working under the never-before invoked Article 6(i) of the Doha

Declaration, which allows developing countries to bypass patent laws and produce and export to

countries within their respective trade agreement regions, as long as more than half of them are

least developed countries. In addition, the paper asks the World Bank to help secure a non-

interest loan of $2 million dollars to allow African Pharmaceuticals to get WHO bioequivalency

testing, and to be able to access wider markets for their drugs.

Part I. Terms

Anti-retroviral Treatment

! Anti-retrovirals (ARVs) are not a cure for HIV/AIDs, but they can keep people from

becoming ill if they take them everyday for the rest of their lives. Patients have to take a

combination of drugs (drug cocktails) so that they do not develop resistance to the treatment.

There are over 20 WHO approved drugs, but they vary in price, availability, and side effects.

After as short as 4- 5 years of “first-line” drug therapy, 8doctors have to shift HIV-infected

patients to “second-line” treatment. Most treatments consist of two NRTIs and one NNRTI. The

most common anti-retroviral therapy (ART) was triamune, or triple combination therapy which

consisted of stavudine, lamivudine and nevirapine (triomune) but a recommendation by the

WHO on December 1 of this year, suggests the discontinued use of stavudine because of its

negative side effects. Some improved first line combinations have been combined within a daily

pill called a ‘fix dose combination.’ Also, in recent years, first-line drugs have ranged around $99

pp/year in least developed countries (LDCs), whereas second-line drugs start at around $700 pp/

year in LDCs.9 Second-line drugs are more complicated to manufacture, as well as have newer

patents, therefore few generic producers have attempted to manufacture them. The focus of this

paper will be on the domestic production of first-line ARVs.

4

8 Avert. 2009. AIDS, drug prices and generic drugs. Avert: AVERTing HIV and AIDS.! http://www.avert.org/generic.htm9 Médecins Sans Frontières. 2007.

TRIPS and Licensing

! One of the greatest obstacles to keeping ARV prices low, is intellectual property rights

also known as TRIPS (Trade Related Aspects of Intellectual Property Rights). TRIPS was

introduced in 1995 to give pharmaceutical industries the right to patent their drugs for twenty

years. This prohibits the production of generic drugs (i.e., identical copies or bio-equivalents of

the patented brand-name drug). Therefore, no company can make, use, sell, offer to sell, or

import the patented drug. The patents do not always benefit research and development, however,

since Universities who create patented drugs often spend billions on R&D and are lucky to make

only a few million on royalties.10 In any case, the majority of developing nations with high

manufacturing capacity, were given a ten year transition period to bring their legislation in line

with TRIPS; developing countries such as India were given until 2005, while least developed

countries are allowed to disregard patents until 2016.

! One way that a generic drug manufacturer can avoid patents is through applying for a

voluntary or a compulsory license. Patent holders grant companies voluntary licenses, if they

want to produce or import a generic version of the drug during a public health emergency.

Governments grant compulsory licenses to companies who make a case that patent holders are

abusing their rights and keeping prices unfairly high for potential consumers. Since 2001,

compulsory licenses can be issued during a severe health emergency without having to pay

royalties to the patent holder. Thankfully, the production of generic ARVs have provided

affordable drugs on the market. To meet their new competition, many brand name producers

dropped their prices right above generic prices. “The graph below illustrates the effect of generic

competition on proprietary drug prices between 2000 and 2001.” 11

5

10 Wagenberg, Maria van. 2009. “Harvard’s patent policy limits access to drugs by world’s poor.” Harvard, Massachussetts: Harvard Law Record. ! http://www.hlrecord.org/opinion/harvard-s-patent-policy-limits-access-to-drugs-by-world-s-poor-1.95223311 Avert. 2009. AIDS, drug prices and generic drugs

! Another way that a producer could avoid patent restrictions is specified in Article 6(i) of

the Doha Declaration on the TRIPS Agreement and Public Health Decision of the General

Council of 30 August 2003. This clause legally provides an opening for import or production of

patented drugs. It allows the company to export to a group of countries party to a regional trade

agreement, consisting of more than half Least Developed Countries, and sharing a similar health

concern.12

6. " With a view to harnessing economies of scale for the purposes of enhancing !purchasing power for, and facilitating the local production of, pharmaceutical products:

! (i) where a developing or least-developed country WTO Member is a party to a regional ! trade agreement within the meaning of Article XXIV of the GATT 1994 and the Decision ! of 28 November 1979 on Differential and More Favourable Treatment Reciprocity and ! Fuller Participation of Developing Countries (L/4903), at least half of the current ! membership of which is made up of countries presently on the United Nations list of least ! developed countries, the obligation of that Member under Article 31(f) of the TRIPS ! Agreement shall be waived to the extent necessary to enable a pharmaceutical product ! produced or imported under a compulsory license in that Member to be exported to the ! markets of those other developing or least developed country parties to the regional trade ! agreement that share the health problem in question. It is understood that this will not ! prejudice the territorial nature of the patent rights in question;13

6

12 Perkins S, and de Wit M. 2007. "The African private sector steps in to fill the drug gap". Lancet. 370 (9589): 722-3.13 General Council. 2003. Implementation of paragraph 6 of the Doha Declaration on the TRIPS Agreement and public health. Geneva: World Trade Organization.! http://www.wto.org/English/tratop_e/trips_e/implem_para6_e.htm

ARV Provision Programs- Global Fund and Clinton HIV/AIDS Initiative (CHAI)

! To acquire ARVs in Sub-Saharan Africa, a community can ask their Country

Coordinating Mechanisms to send a grant proposal to the Global Fund. The Global Fund is a

financing mechanism, which receives money from governments and private donors and then

awards it to Principal Recipients, based on the technical quality of their applications. On average,

the US is the biggest single donor to the Fund, making up about 33% of the total funds every

year.14 Sixty-one percent of the Funds' budget goes towards HIV/AIDS. More than half of its

funds are allocated to Sub-Saharan Africa alone. Fourty-five percent of its total expenditures go

towards the procurement of drugs, commodities and products.15 By November 30, 2009, the

Global Fund supplied 2.5 million people worldwide with ARVs.16

! In 2007, The Global Fund established the Voluntary Pooled Procurement (VPP) service

so that countries with low procurement volumes of ARVs could pool their drug orders and

benefit from more competitive pricing.17 The Fund also contracted The Clinton HIV/AIDS

Initiative (CHAI) to provide technical support, help them to negotiate prices, and select suppliers

for ARVs. The VPP also ensures that all ARVs comply with the Global Fund’s Quality Assurance

Policy for Pharmaceutical Products. The Global Fund will only purchase from manufacturers

who are pre-qualified by the WHO.18 Especially with ARVs, it is important that standards of

quality are ensured so that the chance of resistance to the treatment is minimized.

! Founded in 2002, The Clinton HIV/AIDS Initiative (CHAI) was designed to negotiate

lower prices for ARVs. Since then it has “transformed the marketplace for HIV commodities

from a low-volume, high-margin market to a high-volume, low margin market through

7

14 Avert. 2009. The Global Fund to Fight AIDS Tuberculosis and Malaria. Avert: AVERTing HIV and AIDS. !! http://www.avert.org/global-fund.htm15 Global Fund, The. 2009. Distributing and Funding after 7 Rounds. The Global Fund to Fight AIDS, Tuberculosis and Malaria.! http://www.theglobalfund.org/en/distributionfunding/?lang=en16 Global Fund, The. 2009. Fighting AIDS, Tuberculosis and Malaria. The Global Fund to Fight AIDS, Tuberculosis and Malaria.! http://www.theglobalfund.org/en/fighting/?lang=en17 Global Fund, The. 2009. Procurement Support Services. The Global Fund To Fight AIDS, Tuberculosis and Malaria. ! http://www.theglobalfund.org/documents/psm/InformationNote_VPP_and_CBS_en.pdf18 Global Fund, The. 2009Quality Assurance Information. The Global Fund To Fight AIDS, Tuberculosis and Malaria. ! http://www.theglobalfund.org/en/procurement/quality/

simultaneous and intensive engagement on both the supply and demand sides of the market.” 19

Since CHAI combined their negotiating power with the purchasing power of UNITAID in 2006,

the price of first line treatment has decreased by 50% and second line treatment by a cumulative

30% in low income countries. 20 More specifically, CHAI currently works with 8 suppliers, who

offer some of the lowest prices on 40 formulations, simply by being able to sell and deliver in

bulk. CHAI sends out a bid for new suppliers every year and selects based on three criteria:

price, registration coverage in countries where UNITAID-CHAI have programs, and historical

supply performance including adherence to delivery dates.21

! Unlike Global Fund, The Presidents Emergency Plan for AIDS Relief focuses on direct

funding from the US Government. A Global AIDS Coordinator, supplies money to government

agencies who then supply the funds to prime partners in different countries. PEPFAR also uses a

one-stop-shop for procurement of their ARVs. Since September 2008, they have supplied 2.1

million people with ARVs. PEPFAR also uses a “one-stop-shop” for procurement of their ARVs.

In 2005, they contracted Partnership for Supply Chain Management (SCMS). In 2008, PEPFAR

gave more money to SCMS ($84 million) than any of their other partners.22 Another criticism of

PEPFAR is of particular concern; the Statement of the Ecumenical Pharmaceutical Network from

Moshi, Tanzania argues that “PEPFAR disregards national drug regulations and local supply

chain management systems, which could damage national health systems, especially the

pharmaceutical sector.”23 According to the Institute of Medicine, the SCMS should support

local and regional systems rather than simply support a “US-controlled system.”24

8

19 Clinton Foundation. 2009. “Our Approach: Access Programs.” William J. Clinton Foundation: Treating HIV/AIDS & Malaria: Clinton HIV/AIDS Initiative. ! http://www.clintonfoundation.org/what-we-do/clinton-hiv-aids-initiative/our-approach/access-programs20 Clinton Foundation. 2009. “What We’ve Accomplished.” William J. Clinton Foundation: Treating HIV/AIDS & Malaria: Clinton HIV/AIDS Initiative. ! http://www.clintonfoundation.org/what-we-do/clinton-hiv-aids-initiative/what-we-ve-accomplished21 Clinton Foundation, 2009. “UNITAID-CHAI ARV Supplier Selection Process.” William J. Clinton Foundation: Treating HIV/AIDS & Malaria: Clinton HIV/AIDS Initiative.! http://www.clintonfoundation.org/files/supplement_to_chai_unitaid_2010_arv_supplier_selection_process.pdf 22 PEPFAR. 2009. Partners. The United States President’s Emergency Plan for AIDS Relief: Office of the U.S. Global AIDS Coordinator, U.S. Department of State.!! http://www.pepfar.gov/partners/23 Ecumenical Pharmaceutical Network (2006, May), 'EPN Statement on PEPFAR Supply Chain Management System'.24 Institute of Medicine (2007) ‘PEPFAR Implementation: Progress and Promise’.

Part II. Problems with the current system of ARV supply

! The current system of treatment of AIDS is insufficient because costs of ARVs are out of

reach for many people in developing countries, where treatment is needed most. Donor

organizations, like the Global Fund and PEPFAR, have a limited budget and can only afford to

treat a small percentage of the people who are in need. To improve the current system, it is

necessary to find ways to lower costs of treatment.

! Known as Big Pharmaceuticals, Originators, Innovators or Brand name manufacturers,

these firms have been notorious for keeping their drug prices high. One quarter of ARV drugs

developed between 1988 and 2005 were patented by Universities and then eventually licensed to

big pharmaceutical companies.25 In many cases, the Universities neglect to specify global access

provisions. For example, Harvard “only included global access provisions in 5 out of 62 licenses

over the past two years (2007- 2009).” Global Access provisions include tiered pricing, financial

incentives, mandatory sub-licenses to generic manufacturers and non-patenting policies; these

provisions are an attempt to enable poorer countries to have more access to the drugs they need.

! In 2001, “a group of Yale students learned that d4T (stavudine), an HIV antiretroviral

drug patented by Yale and licensed to Bristol-Myers Squibb, was being sold at outrageous prices

overseas, blocking off access for HIV patients living in South Africa and other developing

countries.” 26 Without the provisions in place, big pharmaceutical companies often choose to sell

their brand name drugs primarily to developed countries. “PhRMA [...] concedes that Africa

comprised only 0.5% of sales in 2007” while “the U.S. represented 67.7% of 2007 world

sales.” 27

! However, global access provisions are not necessarily the best solution for creating more

access for ARVs. First, provisions can remain secret or hidden within the patents; “the nature of

the access provisions, the number of medical licenses, and even the identity of the drugs covered,

9

25 Wagenberg. 2009. ! http://www.hlrecord.org/opinion/harvard-s-patent-policy-limits-access-to-drugs-by-world-s-poor-1.95223326 Ibid.27 Ibid.

remain opaque.” 28 Secondly, the provisions themselves can be incredibly hard to monitor. One

provision, tiered pricing, which allows pharmaceuticals to change the prices of their ARVs for

different countries, makes it incredibly hard for countries to compare prices or find the lowest

cost supplier. In an article by the African Press International titled “Countries pay widely varying

prices for ARVs” it states, “some nations are paying up to three times more for the life-

prolonging medicines than others with similar HIV prevalence and income levels. In 2007

Nigeria paid US$334 per patient per year for a combination of first-line ARVs that cost Congo

only US$95. Both are low-income countries, but Nigeria has a higher HIV prevalence of 3.1

percent, compared to Congo’s 1.2 percent.” 29 This discrepancy in pricing is due to global access

provisions because “when originator companies apply discounted prices on ARVs, each has

different eligibility criteria, which is a considerable source of confusion for purchasers” 30 For

example, according to Médecins Sans Frontières, Merck gives discounts to countries which are

lowest on the Human Development Index and have >1% HIV prevalence rates, GlaxoSmithKline

offers its lowest prices to Global Fund Grantees and Gilead has an entirely different list of

eligible countries.31 Therefore, access to ARVs is not fair and those countries who need them

most may have to pay more for them if they depend on the big pharmaceuticals to decide.

! As a result many governments and donors have neglected to buy from brand producers

and substituted their ARV supply with generic drugs instead. According to PEPFAR's 2009

annual report to Congress, "In FY2007, 73 percent of antiretroviral drugs delivered through

PEPFAR, and 93 percent delivered through SCMS, were generic formulations. By using

generics, PEPFAR partners were able to save an estimated $64 million — a 46 percent reduction

in cost if they had purchased only innovator drugs."32 Generic production has indisputably

10

28 Ibid.29 AfricanPress. 2009. “Global: Countries pay widely varying prices for ARVs.” African Press International.! http://africanpress.wordpress.com/2009/09/10/global-countries-pay-widely-varying-prices-for-arvs/30 Médecins Sans Frontières. 2007. Untangling the Web of Price Reductions. Campain for Access to Essential Medicines. Geneva: Médecins Sans Frontières. ! http://www.accessmed-msf.org/fileadmin/user_upload/diseases/hiv-aids/Untangling_the_Web/UTW10_RSep_horizontal.pdf31 Ibid.32 Office of the United States Global AIDS Coordinator. 2009. Celebrating life: the U.S. president's emergency plan for AIDS relief : 2009 annual report to congress. Washington, D.C.: Office of the United States Global AIDS Coordinator. ! http://www.pepfar.gov/documents/organization/113827.pdf

contributed to lower costs of ARVs, and consequently increased access to AIDS treatment in

poorer countries. Generic producers (specifically an Indian Pharmaceutical company) created a

triple combination therapy in 2001 that was available for $295 per person bringing the price of

treatment down from a whopping US $10,000-15000 in 1996. Today the most widely used drug

treatment (d4T+3TC+NVP) is available for $US 88 per person per year.33

! Generic Production may not be able to continue in the way it has in the past because of

approaching patent blocks. Indian Pharmaceuticals skirted their 2005 WTO compliance deadline

using the Indian Patents Act 2005, which, overrides the WTO patent regulations using an

“automatic licensing system.” This automatic licensing allows the manufacturers to continue

producing generic drugs that they were already producing, as long as the pay a reasonable

royalty to the patent holder. Whether India or China will be able to apply for voluntary or

compulsory licenses to produce new drugs (such as second-line ARVs) that will come out in the

future is still in question. Since these companies often supply over 40% of the API to many

countries, if they are blocked by new patents, ARV prices will again spike up creating a new

price crisis. (Graph 4 and explanation34)

11

33 Avert. 2009. AIDS, drug prices and generic drugs.34 Médecins Sans Frontières. 2007.

! Generic producers also depend on WHO regulations and guidelines to determine what

drugs are in demand and which drugs should be created. First, if the WHO recommends a drug to

be included in the first line therapy, that is still under patent, the cost of treatment could

significantly rise. On December 1, 2009 the WHO recommended “that countries phase out the

use of Stavudine, or d4T, because of its long-term, irreversible side-effects. Stavudine is still

widely used in first-line therapy in developing countries due to its low cost and widespread

availability. Zidovudine (AZT) or Tenofovir (TDF) are recommended as less toxic and equally

effective alternatives.” 35 Fortunately, the Clinton Foundation (CHAI) and UNITAID have been

able to keep prices low by buying drugs in bulk. “These price reductions were made possible by

the UNITAID Second-Line Project, which has increased and aggregated demand for tenofovir by

supplying other tenofovir-based products for use in second-line treatment and also on an

exceptional basis for first-line use in three countries. While the focus of this UNITAID project is

on second-line price reductions, the increased tenofovir volumes have translated into a

cumulative price reduction since 2007 of 62 percent for once-daily first-line HIV/AIDS treatment

in low-income countries, further broadening the market impact of UNITAID support.” 36

! In the same recommendation, the WHO pushed back their recommendation for when to

begin treatment with ARVS. Whereas in 2006, the WHO had people begin treatment when they

were typically showing symptoms, the “WHO is now recommending that ART be initiated at a

higher CD4 threshold of 350 cells/mm3 for all HIV-positive patients, including pregnant women,

regardless of symptoms.” 37 Now that AIDS treatment is recommended for patients at an earlier

stage, there will be more of a demand for ARVs in the near future.

! As the WHO changes their recommendations to include newer drugs and start treatment

at an earlier stage, organizations like the Global Fund, are struggling to meet the increase in

demand. “The Fund’s 8th funding round, which closed in the Fall of 2008, was three times the

12

35 World Health Organization. 2009. “New HIV recommendations to improve health, reduce infections and save lives. Geneva: World Health Organization. ! http://www.who.int/mediacentre/news/releases/2009/world_aids_20091130/en/index.html36 Halperin, Mark. 2009. “Release From Clinton Foundation: UNITAID and the Clinton HIV/AIDS Initiative Announce New Price Reductions for Key AIDS Medicines.” TIME: The Page.! http://thepage.time.com/release-from-clinton-foundation/37 Ibid.

size of Round 7. This was due to an increased number of higher quality and larger applications

than in the past [...] If Round 8 is funded at the recommended levels, very little money would be

left for future rounds.” 38 To save money, grants Approved Grants have to take 10% efficiency

cuts, phase II of existing and future grants will be cut by 25%, the number of rounds per year is

reduced to 1 again and round 9 postponed 6 months and second round grants are capped at

140%. Uganda has been hard hit by cuts in the budget since 95% of their ART program is funded

by PEPFAR or Global Fund.39 Milly Katana, an HIV activist, attributes ARV shortages in the

country to lack of donor funds: “many donors like PEPFAR, the Global Fund and others, who

had been providing ARVs, are reducing the assistance because of the current credit crunch.” 40

Dr. Michael Strong, the PEPFAR coordinator, announced “a blanket freeze on new patient

enrollment” and asked partner organizations to try to postpone treatment and refocus on care."41

All this to say, people who depend on ARVs and the goodwill of donor foundations such as the

Global Fund may be at risk if budgets are constrained as demands and recommendations for

treatment continue to expand. Domestic Production is a viable option for those countries who

want to maintain their sovereignty and avoid being affected by the decisions of other countries.42

Part III. The Solution is Domestic Production

What has worked

! There have been several attempts at domestic production in Africa: Zimbabwe

(Varichem), Kenya (Cosmos), Ghana (Danadams), South Africa (Aspen), Uganda (Quality

Chemicals Ind.), and most recently Mozambique. This section will look at what has worked for

these case studies and then what hasn’t worked. As a preface to this section, domestic production

13

38 Health Gap. “The Global Fund’s Funding Crisis.” Health GAP: Global Access Project.! http://www.healthgap.org/globalfundshortfallfacts.htm39 Kintu. 2009. “Crisis of lack of Antiretrovirals in Uganda.” HealthDev.net.! http://healthdev.net/site/post.php?s=575740 Basudde, Elvis. 2009. “Uganda: Crisis as ARVs Run Out.” allAfrica.com.! http://allafrica.com/stories/200907270244.html41 Basudde. 2009.42 Personal correspondence with Dr. Rudolf V. Van Puymbroek, Senior Scholar at the O'Neill Institute for National & Global Health Law of the Department of International Health at Georgetown University December 11, 2009.

can only be a solution to fill the gap of supply for ARVs in countries where the environment will

not prove to be a barrier to production. For example, some countries, such as Zimbabwe

experienced more challenges than others, such as South Africa because of their external

environments. The economy and political system must be sufficiently stable to support this

enterprise.

! Four out of the five domestic producers offer prices that are competitive with the market.

Improving access to HIV/AIDS medicines in Africa Trade-Related Aspects of Intellectual

Property Rights (TRIPS) flexibilities utilization, a book published by the world bank in 2008

argues explicitly that Zimbabwe, Kenya and South Africa were able to offer prices below the

current domestic prices. Before the expansion of Varichem to include ARVs, costs of treatment

per person in Zimbabwe ranged from $30-$50 per month. However, Varichem’s generic versions

of lamivudine-zidovudine would only cost about $15 per person.43 Kenya’s domestic producer

Cosmos, was granted a voluntary license from pharmaceutical giants GSK and Boehringer

Ingelheim (BI) for the production of lamivudine, nevirapine, and ziduvudine. Although Cosmos

offered lower prices for their generic versions, GSK and BI cut their prices for these drugs in

order to compete with the domestic producer. 44Although Cosmos did not retain the lowest cost

for ARV supply, their entry into the market was significant because it cut the cost of brand name

drugs and thus benefitted the population in need of ARVs. Lastly, Aspen commands a high

portion of the local South African ARV market and its public sector prices, at R100 (US$10) per

month per person, are highly competitive. These are partially offset through government

purchase of production materials in a tradeoff for lower prices.45 "In another article, The African

private sector steps in to fill the drug gap, Danadams prices are reported as extremely

competitive. According to Sarah Perkins, Faculty of Law at the University of Toronto, "If

Danadams could afford the bioequivalence tests to obtain WHO approval, it could be supplying

14

43 Osewe, Patrick L., Yvonne K. Nkrumah, and Emmanuel K. Sackey. 2008. Improving access to HIV/AIDS medicines in Africa Trade-Related Aspects of Intellectual Property Rights (TRIPS) flexibilities utilization. Washington, DC: World Bank. p. 3144 Osewe et al. 2008. p. 33-3445 Osewe et al. 2008. p. 37

even more of the country's drug needs at prices on a par with or lower than those from India.” 46

Lastly, according to the WHO, Uganda imports most of its drugs, but that may be about to

change: “The first batch of locally produced generic ARVs and antimalarial drugs are expected to

be delivered to the health ministry this year in a move that will see the cost of these life-saving

remedies dropping from between US$ 15 and US$ 9 to between US$ 9 and US$ 2 per patient per

month, Ugandan officials say.” 47 In sum, Zimbabwe, Kenya, South Africa, Ghana, and Uganda

have all quoted prices that compete with the current generic ARV prices.

! Domestic Producers have sometimes functioned as key suppliers in moments of drug

shortage. For example, During a 2004 shortage of ARVs in Ghana caused by a change in patent

laws and the issuance of a compulsory license to Danadams, Ghana was forced to find new

sources of ARVs. From this situation Danadams received a one-time contract worth over

$250,000, or a little over 5% of the ARV market in Ghana. The other 95% came largely from

Indian generics manufacturers.48 An article entitled “Crisis of lack of antivirals in Uganda”

reports that in the summer of 2009, “Ministry of Health facilities across the country have

reported stock outs of ARVs which means people living with HIV stop taking the drugs or have

their drug regimens (combinations) changed.” 49" According to Dr. Michael Strong, the PEPFAR

coordinator, "We expect that PEPFAR funding for Uganda will continue at its current level of

around $280m annually through 2013. But this will still leave a gap between national treatment

needs and the funds available. Uganda needs to identify other resources to fill this gap."50 Since

Uganda used to be 95% funded by PEPFAR and Global Fund, Uganda’s new domestic

pharmaceuticals factory, which opened in October 2007 to manufacture ARVs and antimalarial

drugs hopes to step in to fill the new gap with targets of 240,000 people on treatment by 2012

and 342,200 by 2020.51 South Africa is the domestic production success story. Originally

15

46 Perkins S, and de Wit M. 2007. "The African private sector steps in to fill the drug gap". Lancet. 370 (9589): 722-3.47 World Health Organization. 2009.“Uganda edges closer to AIDS treatment for all.” Geneva: World Health Organization.! http://www.who.int/bulletin/volumes/86/6/08-020608/en/print.html48 Osewe et al. 2008. pp. 4049 Kintu. 2009.50 Basudde. 2009. 51 "Avert. 2009. “HIV and AIDS in Uganda.” Avert: AVERTing HIV and AIDS.! http://www.avert.org/aids-uganda.htm

established in Steven Saad’s suburban home in 1997, today Aspen is one of the top 20

manufacturers of generic medicines globally today, and secured nearly 50% of the local generic

market share in 2007.52

What has not worked

! First, many countries do not even look into domestic production as an option because

they are intimidated by the paperwork and legalities. Few countries have tried to exercise the

rights of flexibilities in TRIPS laws, “citing a lack of capacity and legal know-how to negotiate

the complicated paperwork required, and political pressure from foreign governments.” 53 The

idea of licensing can be daunting, and compulsory licensing can sometimes result in a slap on the

wrist from big pharmaceutical companies. For example, Thailand issued a compulsory license in

2007 to import and produce LPV/r, but the patent holder, Abbott retaliated by refusing to register

new drugs in Thailand.54 Although Abbot has received condemnation in the global eye, their

response has created fear within countries who might consider applying for licenses but do not

want to risk their ability to access these life-saving drugs. An article from SouthAfrica.info titled

SA’s pharmaceutical success story, attributes Steven Saad’s ability to make Aspen into South

Africa’s leading pharmaceuticals producer, to his “foresight in securing voluntary licenses from

multinational pharmaceutical companies for the manufacture of more affordable generic

antiretrovirals.” 55 Without attempting to work within the TRIPS agreement, countries will always

depend on foreign producers to make decisions about what drugs and what prices are best for

them.

! Many domestic manufacturers cite the high cost of bio-equivalency tests and API import

costs as barriers to entry into the market.

16

52 Reuters. 2009. “Update 2-SAfrica’s Aspen wins tender, shares soar.” Reuters.! http://www.reuters.com/article/idUSL266147172008062653 AlertNet. 2009. “GLOBAL: Countries pay widely varying prices for ARVs.” Thomas Reuters Foundation: AlertNet.! http://www.alertnet.org/thenews/newsdesk/IRIN/e2eea90174c4149a37c6dda8f5afdcec.htm54 Médecins Sans Frontières. 2007. 55 Zachariasen, Angela. 2008. “SA’s pharmaceutical success story.” SouthAfrica.info.! http://www.southafrica.info/business/success/aspen-290708.htm

“The prices of locally produced ARVs in Ghana, Kenya, and Zimbabwe do not include the extremely high cost of in vivo bio-equivalence tests. "Given that in vivo bio-equivalence is a prerequisite for the attainment of WHO pre-qualification, the current prices will most likely increase sharply should these countries attempt to meet this requirement."56

In an interview, the chief executive of Danadams (Ghana) identified three major challenges:

(a) the high cost of bio-equivalence tests for each product that are required for the acquisition of WHO pre-qualification, (b) the high cost of APIs when purchased in relatively small quantities, and (c) the inadequate market share and lack of economies of scale that result from an inability to supply under the Global Fund arrangements (this in turn the result of the absence of WHO pre-qualification).57

Cosmos cited the same major obstacles quoting bio-equivalency tests at “$50,000 per ARV (and

even higher for fixed-dose combinations), as well as the high cost of APIs, which accounted for

an estimated 50 percent of the ex-works price of ARVs.” 58

! Costs of bio-equivalency tests are only the tip of the iceberg, while the larger problem of

achieving successful domestic production is breaking into the supply chain that is already well-

established. Sarah Perkins, Faculty of Law at the University of Toronto, argues that:

Quality assurances are important for antiretrovirals, [and] obtaining WHO approval is expensive and daunting for burgeoning manufacturers. By linking Fund money to WHO approval, a monopoly has been created, ensuring that only well established manufacturers, such as those in the USA, Canada, Europe, and India, will be able to supply most of the world's antiretrovirals. Unless something changes, manufacturers in developing countries will be left out from the potential financial boon in antiretrovirals created by the Fund and WHO.59

Dr. Rudolf V. Van Puymbroek, Senior Scholar at the O'Neill Institute for National & Global

Health Law, advises any new domestic producers trying to break into the business to avoid

producing the same drugs produced by CHAI manufacturers60. These contracts for large sums of

ARVs keep their prices as low as possible and make it extremely hard for small start-ups to even

have a chance at offering competitive prices when CHAI and UNITAID send out their yearly

bids for the lowest prices. Kenya experienced a similar scenario when they first began producing

ARVS in 2003. “It is pertinent to note that the moment Cosmos started manufacturing ARVs,

GSK and BI lowered their prices for those ARVS below the prices offered by Cosmos, further

17

56 Osewe et al. 2008. p. 4357 Osewe et al. 2008. p. 4158 Osewe et al. 2008. p. 34-3559 Perkins S, and de Wit M. 2007. "The African private sector steps in to fill the drug gap". Lancet. 370 (9589): 722-3.60 Personal correspondence with Dr. Rudolf V. Van Puymbroek, Senior Scholar at the O'Neill Institute for National & Global Health Law of the Department of International Health at Georgetown University December 11, 2009.

endangering the viability of the Kenyan company's ARV production plan.” 61 This case reveals

how established firms with a large market share have an advantage of price flexibility over a

start-up firms that might depend solely on independent or government contracts.

What could work

! If a country feels that they want to begin domestic production of ARVs in their

pharmaceutical industry, Sarah Perkins, suggests they look at Article 6(i) of the Doha,

Declaration on the TRIPS Agreement and Public Health Decision of the General Council of 30

August 2003.62 Though the clause has never before been invoked, it allows domestic producers

to bypass the complicated paperwork of applying for a voluntary license as well as the risks of

applying for a compulsory license and accusing a patent-holder of unfair pricing, such as was the

case with Thailand.63

! Especially in Africa where 33/47 countries are LDCs, there are several groupings of

countries which fit the description of Article 6(i) and belong to a regional trade agreement that

consists of more than 50% LDCs. For example, Danadams in Ghana could produce and export

to ECOWAS (the Economic Community of West African States) which consists of 9/13 LDCs.

Cosmos in Kenya or Quality Chemical Industries in Uganda (a LDC) could export to the EAC

(East African Community) which consists of 4/5 LDCs. Mozambique could export to the SADC

(Southern African Development Community) which consists of 7/14 countries (with

Madagascar’s recent suspension). Firstly, exportation to a regional grouping allows local

producers to focus specifically on the gap between what donor countries are offering, and who

still needs treatment in that region. If transportation is feasible between the countries in the

region, they could benefit from lower transportation costs by importing the drug from a regional

producer rather than importing it from a foreign one. Secondly, countries grouping together

around a shared health concern would be positive for general regional integration purposes, as

18

61 Osewe et al. 2008. p. 34-3562 Perkins S, and de Wit M. 2007. "The African private sector steps in to fill the drug gap". Lancet. 370 (9589): 722-3.63 Médecins Sans Frontières. 2007.

well as for African countries taking on the responsibility of solving the ballooning HIV/AIDS

burden themselves.

! Countries hoping to begin domestic production should select the drug cocktail they

choose to produce very wisely. CHAI has done extensive research on how to get the lowest

prices from its 8 generic manufacturers. These manufacturers already produce every drug

product on the WHO list of recommended drugs. At the same time, these suppliers will not

always have the upper-hand on incoming producers, because the list of recommended drugs keep

changing. For domestic production, Dr. Rudolf V. Van Puymbroek suggests that producers avoid

producing what CHAI does best (the standard first-line cocktail). Uganda made the mistake of

getting into production of the wrong drug, Stavudine, which the WHO recently removed from its

list of recommended drugs. “This has shuttered the hopes of PLHIV [People Living with HIV]

who had hoped that now that the drugs being home-made, they will be more affordable and

readily available to the Ugandan population.” 64

! It is important that domestic producers are very strategic. If they choose to produce a

drug that is already being manufactured by a CHAI producer, it might be advised that they look

at drugs that are being produced by only 1/8 manufacturers and are still only offered at a high

cost.

19

64 Kintu. 2009.

(Chart above65) For example, countries might want to focus on improved first line drugs, such as

a daily pill that combines the drugs tenofovir, lamivudine and efavirenz (EFV) and abides by the

new WHO recommendations. CHAI has negotiated pricing for this treatment to $210 pp/year

down 37% from the average market price for low income countries, but only one generic drug

company, Matrix, is producing it.66

!

Part IV. Counter arguments of domestic production

! The most basic economics argument against domestic production is that Africa does not

have comparative advantage in the pharmaceuticals industry. Few may believe that anyone

could produce generics more cheaply than China or India. Dr. William McGreevey, Associate

20

65 Clinton Foundation. 2009. ARV Price LIst. Clinton Foundation HIV/AIDS Initiative (CHAI).! http://docs.google.com/viewer?a=v&q=cache:Xf92NmDxj1YJ:www.clintonfoundation.org/download/%3Fguid%3D62e82ddc-98de-102b-be34-001143e0d9b6+clinton+foundation+arv+price+list&hl=en&gl=us&pid=bl&srcid=ADGEESiy-UDnrgh_cpCY--IfcEfcAm1jKUgU6Tnz8cLh0G5JouHckZZEnDDUqSAbLObAGoGTaEMRnvFpgwCO4MMCCjQNYZfQnGMNS96jJjQcHYIcZ24N74sosdTAGKfzS2NAoqU5lnq9&sig=AHIEtbQ--uGK7Lv8k3ra0WQqqd9qGi0wcQ66 Halperin, Mark. 2009.

Professor in the Department of International Health at Georgetown University advises Africa to

take China’s advice and find out what it can sell to developed countries, whether that be textiles

or handicrafts.67 Economists fear that if Africa tries to take on an industry in which it does not

have comparative advantage, it will fail miserably. In a personal correspondence, Dr.

McGreevey cited the import substitution model - every country who adopted it in in the 50s and

60s failed to grow because they were trying to make domestically what could be more easily and

more cheaply bought abroad68. McGreevey argues that, by allowing the market to do the work,

countries can enjoy unexpected consequences. For example, skilled health professionals might

board on a plane to the United States on the day of their graduation from medical school in

Africa, but they will send money home, which will help their families and which could

encourage their children and grandchildren pursue their education69.

! The comparative advantage argument is sound in a perfect world, but it disregards

countries’ desires for self-sovereignty. ARVs seem to be different than any other average

commodity because of their emotional tug on the people.70 Countries may want the assurance

that the lives of their own populations are somewhat in their control. Ghana-born Managing

Director of Danadams Pharamceuticals Limited, Dr. Yaw Adu Gyamfi states:

The reason why we specifically focused on HIV and anti-malaria medication is that five years ago we identified these diseases as the ones that are having the greater impact upon the public as a whole....rather than producing over the counter medication, like pain killers, we decided to become focused in an area where we knew there was a market, while at the same time the social dimensions of our a work would have a greater impact on society.71

Gyamfi argues that Ghana should take responsibility. “Each country must solve its own

problems,” he says. “For Ghana or Africa to make it, we have to make things happen

ourselves.” 72 If international donors or the US suddenly dropped the ball, people who could not

21

67 Personal correspondence with Dr. William McGreevey, Associate Professor in the Department of International Health at Georgetown University. December 2009.68 Ibid.69 Ibid.70 Personal correspondence with Dr. Mead Over Senior Fellow at the Center for Global Development (CGD), and former Lead Health Economist in the Development Research Group at the World Bank. December 2009.71 Denby, Jennifer; Frempong, Isaac. 2009.“Danadams Pharmaceuticals Limited: Ghana’s only ARV producing compnay.” Manufacturing Digital.! http://www.manufacturingdigital.com/Danadams-Pharmaceuticals-Limited--Ghana-s-only-ARV-producing-company_38842.aspx72 Ibid.

afford drugs would die. Uganda has already experienced this crisis when the drugs stopped

coming. Within 2 months of not receiving drugs, “Denis Mock, from ADFPHA Apac District

forum of People living with HIV/AIDS, said 17 people [in Uganda] have died.” 73 Domestic

Production answers the call by PEPFAR to “identify other resources to fill [the] gap” between

available funds and the needs of the people.74

! The other evidence against the comparative advantage argument is that many big

pharmaceuticals have chosen to partner with African local pharmaceuticals. In 2008, Chinese

pharmaceutical company, Adams Pharmaceutical (Anhui) Co. Ltd agreed to a joint venture with

Danpong Pharmaceuticals Ghana Ltd in the creation of Danadams;75 Indian Generic

Pharmaceutical, Cipla works directly with Ugandan pharmaceutical importer Quality Chemical

Industries Ind who manufactures an ARV combination therapy76; Brazil, a model in the fight

against HIV/AIDS, is investing $23 million to build a factory in Mozambique in 2009;77

London-based GlaxosmithKline, the second largest drug maker by revenue, holds 81.7 million

shares (or 19%) of Aspen, South Africa. 78 China, India, London, and Brazil have been the

leading pharmaceutical manufacturers in the world, yet they see openings in Africa.

! Many fear that domestic production in Africa is an attempt at the infant industry model

which always fails. Economics has revealed that protection of a domestic industry using tariffs

and trade barriers never benefits the consumers and decreases the net welfare of the country. If

countries choose to protect a domestic industry by taxing imports of the same product to create a

level playing field, the government and the producers will be pocketing the tax-payers money

and the profits from an inefficient industry. People fear that this kind of protection will give

22

73 Basudde. 2009. ! http://allafrica.com/stories/200907270244.html74 Basudde. 2009.! http://allafrica.com/stories/200907270244.html75 Embassy of the People’s Republic of China in the Republic of Ghana. “$4 million Pharmaceutical Joint Venture Inaugurated.” Ghana: Embassy of the PRC in the Republic of Ghana.! http://www.fmprc.gov.cn/ce/cegh/eng/xwdt/t200166.htm76 Kaisernetwork. 2008 “Ugandan Pharmaceutical Plant Begins Production of Generic Antiretrovirals.” Kaisernetwork.org: Kaiser Daily HIV/AIDS Report.! http://www.kaisernetwork.org/Daily_Reports/rep_index.cfm?DR_ID=5010777 AllAfrica. 2009. “Mozambique: Production of Antiretrovirals to Start This Year.” AllAfrica.com.! http://allafrica.com/stories/200911170990.html78 Associated Press. 2009. “Glaxo takes 19 percent stake in Aspen.” Product Design & Development.! http://www.pddnet.com/news-ap-glaxo-takes-19-percent-stake-in-aspen-120109/

corrupt officials more money, and therefore more leverage, hurting the economy and the growth

of the country more than it would give it support. The market does a better job than the people.

Domestic producers should have to bid for the lowest prices like any other company so that they

are forced to be efficient.

! This paper’s model for domestic production is not the infant industry argument model.

First, domestic production under article 6(i) is legally written into the Doha Declaration as of

2003 and provides an opening for LDCs to ask for forgiveness of patent laws. Producing under

this clause does not ask for any government tariffs against imported ARVs, which could cause

complications or lead to corruption. Second, the infant industry model was designed for the sole

purpose of benefitting the domestic economy, disregarding the current level of supply. However,

in the case of domestic production of ARVs in Africa, gaps in the supply have been recognized

and could be filled by the new manufacturers (which may in turn have positive consequences on

the domestic economy).

! Finally, opportunity cost is important to take into consideration. Some may argue that

within the constrained budgets caused by the recent financial crisis, money should be used to find

the cheapest drugs, and not reallocated to a risky venture of creating domestic industry. But, to

view the world in terms of its current crises negates foward-looking attempts at preventing crises

before they happen. Opportunity cost can also be thought of in a different way- what donors

could fund now, versus what they would have to fund later. According to Dr. Mead Over, Senior

Fellow at the Center for Global Development and former Lead Health Economist in the

Development Research Group at the World Bank:

Escalating treatment costs coupled with neglected prevention measures threaten to squeeze out U.S. spending on other global health needs, even to the point of consuming half of the entire U.S. foreign assistance budget by 2016 [...] The United States has unwittingly created a new global ‘entitlement’ to U.S.-funded AIDS treatment that currently costs about $2 billion per year and could grow to as much as $12 billion a year by 2016- more than half of what the United States spent on total overseas development assistance in 2006. "And the AIDS treatment entitlement would continue to grow, squeezing out spending on HIV prevention measures or on

23

other critical development needs, all of which would be considered ‘discretionary’ by comparison.79

Domestic Production is the sustainable solution to the entitlement burden because by funding

domestic production, investors will also be benefitting Africa’s healthcare system, and the health

of Africans infected with other diseases. In countries such as Ghana, Nigeria, and Uganda,

domestic production of anti-retrovirals significantly improves the procurement and distribution

of drugs for other diseases such as tuberculosis and malaria80 . In an October 2009 article, the

chief financial officer of Uganda’s QCIL, Frederick Mutebi Kizito, confirmed that international

investment in the distribution and production of ARVs contributes to a more efficient disease

control mechanism and a substantial price reduction in ARVs and anti-malarial drugs. His

facility, produces both anti-retrovirals and anti-malarial drugs81.

! Studies also show that domestic production improves the skills of pharmacists and

healthcare workers. Particularly, it has improved the skills of pharmacists to provide adherence

counseling82. More and more pharmacy assistants and nurses have been trained to dispense anti-

retrovirals as well as drugs for other chronic diseases83. According to a Lancet publication one

reason for this is that:

The managerial skills needed to keep antiretroviral drugs in stock, to minimize diversion, to confirm that they are administered to those who can use them, and to monitor adherence and side-effects are the same types of skills needed to assure that other important programmes such as safe motherhood packages, malaria, tuberculosis, and sexually-transmitted disease control and diarrheal disease treatment are delivered effectively and consistently.84

Therefore, investing in the infrastructure needed to deliver ARVs will spill over into other

collateral health benefits.

More specifically, in Mozambique, investment in domestic production has forced its

pharmaceutical company and ARV national programs to adopt task shifting in which mid-level

24

79 Over, A. Mead. 2008. Prevention failure: the ballooning entitlement burden of U.S. global AIDS treatment spending and what to do about it. Working paper (Center for Global Development), No. 144. Washington, D.C: Center for Global Development. p. 180 PlusNews. 2009. “GLOBAL: AIDS funding debate heats up.” PlusNews: Global HIV/AIDS news and analysis.! http://www.plusnews.org/Report.aspx?ReportId=867581 Nakkazi, Esther. 2009. “Uganda: Top ARV Factory Gets a Shot in the Arm.” AllAfrica.com.! http://allafrica.com/stories/200910210483.html82 PlusNews. 2009. “GLOBAL: AIDS funding debate heats up.”83 Ibid.84 Marseille E, PB Hofmann, and JG Kahn. 2002. "HIV prevention before HAART in sub-Saharan Africa". Lancet. 359 (9320): 1851-6.! http://www.hsph.harvard.edu/bioethics/pdf/hiv_prevention_before_HAART.pdf

health care workers are trained with the skills of medical doctors to administer ARVs to HIV

patients. Such an approach has been highly effective in a nation that once had merely eighty

physicians for 10.6 million peoples. Even patients from rural and disadvantaged areas now have

access to quality ART services. This method tripled the number of facilities providing

medication within six months.85

Part V. Policy Proposal

Challenges

! In order to fund the development necessary to achieve large scale domestic production of

ARVs in Africa, several possible negative effects must be screened for and avoided. Some of

these problems, such as corruption and rent seeking behaviors, are major political issues in

several Sub-Saharan African nations. Others, such as heavy subsidies, are economic issues that

can decrease the positive effects of development.

! First of all, corruption is a considerable issue in many African governments. In 2006, it

was estimated by those inside of African governments, that corruption cost African nations about

25% of government income each year86. Money and goods are stolen largely through bribes,

political favoritism, and informal connections between politicians and the private sector87. This

often makes investment in African countries and companies a risky venture, as it is possible that

large amounts of the money may be skimmed off of the top or the project could become mired in

political deal-making. Political nepotism may also cause governments to channel aid money and

other funds to companies run by close relatives88. Should this happen, the best case is that the

money may be given to a relatively inefficient company or industry. In the worst case, much of

the aid money could simply be embezzled.

25

85 PlusNews. 2009. “MOZAMBIQUE: Task-shifting brings rapid scale-up of ART rollout.” PlusNews: Global HIV/AIDS news and analysis.! http://www.plusnews.org/Report.aspx?ReportId=8681386 BBC News. 2006. “The Cost of Corruption in Africa.” BBC.co.uk.

http://news.bbc.co.uk/2/hi/africa/4723572.stm87 BBC News. 2009. “Corruption ‘Stifling Economies’.” BBC.co.uk.

http://news.bbc.co.uk/2/hi/business/8271547.stm88 Ibid

! Widespread corruption may then lead to the even larger issue of rent seeking. This occurs

when the political group in power has unprecedented access to further power and wealth and

everyone outside of that limited group is left with almost nothing. Because all of the power is

concentrated in the ruling group and opposition groups are left with no possible avenues, all of

the groups in the system will seek to become in power. And, once in power, these groups will use

their considerable benefits to stay in power rather than develop the country as a whole, simply

because the greatest benefits are derived from staying in power89. Not only could this be caused

through aid donations being dispersed amongst the leading class, but also the through

development of an inefficient industry that is run by government officials or their relatives.

! In order to effectively develop domestic production of ARVs in Africa these situations

must be avoided. Corruption, of course, would be against the interests of such a development

program. Bribes could increase operating costs and embezzlement would decrease the total

amount of aid funds available for use. Funding a rent seeking class will only serve to add to the

already numerous adversities facing certain countries.

! Heavy subsidies given to the pharmaceutical industry are red flags that must be screened

for by effective policy. Subsidies indicate that the industry is unable to be competitive without

help from the government. While this may be economically viable if limited subsidies are

needed, the costs of heavy subsidies often far outweigh the benefits that the industry can

produce. This is especially true in Africa where heavy subsidies often mean that taxpayer money

that could have gone to basic development (greater access to drinking water or primary education

for example) is instead being spent to help prop up an inefficient industry.90 This puts a heavy

burden on the state and, as a result, the taxpayers.

! There have been a couple of examples of African ARV producers requiring subsidies in

order to continue production; most notably in Zimbabwe where the state played a large role in

both the development of the pharmaceutical industry and its maintenance91 . While providing

26

89 Feenstra, Robert. 2007. International Economics. Worth Publishers: New York.90 Personal Correspondence with Mead Over. Senior Fellow, Center for Global Development. December 3, 2009.91 Osewe et al. 2008. p. 30

funding to such an industry may lead to a decrease in the subsidies down the road as the industry

develops, there has been little historical evidence that this will happen. Instead, these industries

will often remain inefficient, as the protective subsidies and aid funding provide little incentive

for the industry to streamline and become competitive92.

Policy

! With these challenges in mind, we believe the most effective policy route to take in order

to help develop domestic production of ARVs in Africa is through the creation of a loan. Such a

loan would be provided through the World Bank International Development Agency (IDA),

which gives low to no interest loans to developing nations, and given to the best proposal

depending on a number of specific criteria.

! First of all, the company must satisfy the requirements outlined under Article 6(i) of the

2003 Doha Declaration. At least 50% of the ARVs produced in the company must be designated

for export only throughout the economic region. At least 50% of the region must be composed of

Least Developed Countries, yet considering both ECOWAS and the East African Community are

largely composed of LDCs, this will not be an issue for companies in these economic

communities. In order for the World Bank to approve a loan for the production of goods

involving intellectual property, patent rights must be agreed upon beforehand93. Through

satisfying the Doha Agreements, however, these companies will be able to produce without

patents and still be in accordance of World Bank policy94.

! Secondly, the company must be compliant with international good manufacturing

practices (GMP). These are international guidelines for management control and quality control

in pharmaceutical production95. In order to acquire WHO qualification and the subsequent

international recognition of quality, companies must be compliant with GMP guidelines96.

27

92 Personal Correspondence with Mead Over.93 Personal Correspondence with Professor Callisto Madavo. Former Vice President for Africa at the World Bank. November 22, 200994 Perkins. 2007. p. 72295 FDA U.S. Food and Drug Administration. 2009. Good Manufacturing Practices. U.S. Food and Drug Administration. ! http://www.fda.gov/Food/GuidanceComplianceRegulatoryInformation/CurrentGoodManufacturingPracticesCGMPs/default.htm96 Osewe et al. 2008. p. 34.

Auditors who specialize in GMPs may be brought in to assess the company’s facilities and

systems to determine if they are in compliance97.

! Companies must also be able to display the capacity to produce ARVs at a large scale in

order to provide treatment, through aid agencies, to at least 25% of those who need it in their

region. Considering that 25% of people requiring ARVs ranges from 225,000 in West Africa to

500,000 people in East Africa, these numbers are certainly within the capacity of current

domestic producers.98 Connected to this, the company must also have a plan to eventually

increase their capacity to reach all of the people who need ARVs in their region. This means that

these companies will be able to start producing and providing ARVs to large portions of the

region as soon as they upgrade facilities and pass quality tests. This ability, coupled with a

detailed plan for future increases, would immediately help scale up current ARV provision

programs.

! The drugs being produced must be competitive on an international scale. This also

includes a lack of heavy government subsidies, as the drugs must be competitive with limited

government help. This, above all else, is one of the most important criteria. If these drugs are not

competitive the money being spent on the development of the industry, subsidizing its costs, and

purchasing its drugs could all be spent on a far more effective project.

! Finally, both the rule of law and corruption ratings, measured annually by the World Bank

through Worldwide Governance Indicators, are important indications of the strength, freedom,

fairness, lack of violence, and corruption of governments in individual nations.99 This is

especially important for aid projects as political instability or corruption could easily destroy

projects and wipe out any gains made. Yet, the outlook for Africa is not entirely negative. In the

2008 ratings for control of corruption, West African nation Ghana scored better than both India

28

97 Ibid, p. 3598 Osewe et al. 2008. p. 34, 3899 World Bank Group, The. 2009. “The Worldwide Governance Indicators Project,” The World Bank: Governance Matters 2009.

http://info.worldbank.org/governance/wgi/index.asp

and China and on a similar level to Italy100. Hopefully, these ratings can provide a way to predict

and avoid countries where upheaval and corruption are likely.

! Using these different methods of screening, the loan seeks to reward companies that have

the greatest chance of succeeding in producing cost-effective ARVs to a large international

market. By avoiding countries that are likely suspects of corruption and political violence or

companies that require heavy government support, the loan also will avoid the challenges that

were stated earlier. Instead, this proposed policy would simply provide enough start up capital,

$2 million, for specific companies to reach economies of scale so that production can be

streamlined and input costs reduced.

! This $2 million figure comes from a combination of bio-equivalence costs and facility

upgrades needed to reach higher capacity production. Considering that WHO bio-equivalency

tests can run to $60,000 per drug produced and that production companies often try to produce

between five and seven drugs in order to produce the necessary drug cocktails, costs can run

upwards of $420,000 for these tests.101 Current domestic producers have also cited facility

upgrade costs of $1 million-$2.5 million in order to reach higher capacity production102.

Therefore, the loan would provide anywhere up to $1.5 million to upgrade facilities to increase

capacity and efficiency and $500,000 in order to pass bioequivalency tests. This loan would not

be too difficult for most companies to pay back, especially at a low or no interest rate. Ghana’s

Danadams company, for example, had a turnover of $4.5 million in 2009 and has seen a steady

increase profits since 2005.103 Also, considering the World Bank gave $297.2 million solely for

Sub-Saharan African private sector development in 2009, this loan would be well within the

means and the goals of the IDA104 .

! Should several proposals score well on the screening, it is important that the funding go

to the best prospects in each region. Given the Doha Agreement’s clause, a producer in an

29

100 Ibid.101 Osewe et al. 2008. p. 37102 Osewe et al. 2008. p. 32103 Denby and Frempong. 2009.104 The World Bank. 2009. “Africa Results: Results Monitorying.” World Bank.

http://web.worldbank.org/WBSITE/EXTERNAL/COUNTRIES/AFRICAEXT/EXTAFRRES/0,,menuPK:3506948~pagePK:64168427~piPK:64168435~theSitePK:3506896,00.html

economic community composed of more than 50% least developed countries can produce

without patents as long as more than 50% of the products are exported, the loan would be

specifically looking for companies in West Africa and East Africa to satisfy the requirements.

The top prospect from ECOWAS and the East African Community, should they satisfy all the

requirements, would be awarded the loan. Should no company satisfy the requirements in either

region, no money will be awarded and the companies can resubmit proposals each year until one

company can satisfy all of the requirements.

Conclusion

! Using the legal framework provided by Article 6(i) of the Doha Declaration on the TRIPS

Agreement in 2003 coupled with a financial boost provided through the World Bank, African

production of ARVs could increase dramatically in a very short period of time. Given the benefits

of this possibility: decreased cost of the drugs produced domestically, sovereign control over a

necessary product, increased regional integration and increased healthcare capacity, domestic

production is something that is of great interest to countries currently crippled by the AIDS

epidemic and those scrambling to meet the needs of treatment. And, while there are strong

economic objections to the development of this industry, issues of dynamic comparative

advantage and important social costs change the structure of this issue beyond a strictly classical

economic interpretation.

! The development of African domestic production could prove to be the force that changes

the current issues with the inaccessibility of ARVs by reducing costs, providing a trusted source

of the drugs, and increasing the confidence of people in the ability of their governments to be

able to handle the challenges of HIV/AIDS. Only with a reliable plan set in place for the

treatment of those with HIV/AIDS, can focus then be turned toward the necessary issue of

prevention to finally bring the epidemic under control.

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Sub-Saharan Africa: World Bank Announces $2 Million Loans for

Development of Antiretroviral Production

WASHINGTON, December 14, 2009- The World Bank’s Board of Executive Directors today approved up to two US$2 million loans to Sub-Saharan Africa. These loans comprise the African Antiretroviral Production Development Loan.

The African Antiretroviral Production Development Loan is one of the newest parts of the World Bank’s action against the African HIV/AIDS pandemic. The program is designed to help immediately increase the capacity of African domestic production of ARVs needed to prolong the lives of those living with AIDS. The loan will be awarded to projects currently producing ARVs. It focuses on two main areas: funding for international quality recognition through WHO certification and increase of production capacity to meet the needs of the economic communities the companies are in.

Loan applicants will be screened to determine licensing, good manufacturing practices, subsidies, current capacity, and possibilities of corruption. It is targeted towards projects in the Economic Community of West African States (ECOWAS) and the East African Community (EAC). If multiple companies satisfy the loan requirements, then the loan will be awarded to the best company in each region.

The US$2 million, no interest loan is repayable in 5 years.

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PERSONAL CORRESPONDENCES

Professor Callisto Madavo Former Vice President for Africa at the World Bank. November 22, 2009

Dr. William McGreeveyAssociate Professor in the Department of International Health at Georgetown University. December 2009.

Dr. Mead OverSenior Fellow at the Center for Global Development (CGD), and former Lead Health Economist in the Development Research Group at the World Bank. December 2009

Dr. Rudolf V. Van PuymbroekSenior Scholar at the O'Neill Institute for National & Global Health Law of the Department of International Health at Georgetown University December 11, 2009.

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